Transportation

Uber's Fare War on New York Taxis Puts Million-Dollar Medallions at Risk

It’s been a great run for New York City’s taxi medallion speculators, but the party could be coming to an end. The average price fell by $5 in June—a slight decline for medallions, which trade for a bit more than $1 million apiece, but still an unheard-of occurrence in recent years. Now Uber, the nationwide scourge of taxi fleets and car services, is moving to make them worth even less by undercutting yellow cabs on price. The company is temporarily reducing New York prices on its low-cost UberX service by 20 percent and boasting that it’s cheaper than taxis in the city.

While Uber has wreaked havoc on the car-service industry in recent years, taxi medallions in America’s biggest city have continued to appreciate at a striking clip. New York keeps the number of medallions low enough that there’s always more demand for rides than there are cabs, which is good news for taxi drivers. Andrew Murstein, president of Medallion Financial (TAXI), which facilitates medallion sales, told me in February that taxi fleets will likely never have to worry about smartphone-based disruption facing the city’s less regulated livery sector. “Uber is nothing more than a terrific black-car company,” he said.

That may be overly optimistic. There are similar signs of strain on medallion values in Chicago and San Francisco. Bloomberg keeps quarterly data on New York medallion pricing going back 10 years, and the last time prices fell for a full year was from 2000 to 2001. The only time the price has dropped during the past decade came in the third quarter of 2013; the drop was tiny—only $1—and the market remained steady until falling slightly last month.

Of course, Uber isn’t the only factor that might put pressure on medallion prices. The city has been selling more yellow-cab medallions and permits to operate so-called green taxis outside Manhattan’s prime areas, adding supply to the market. If you believe there’s a bubble in the taxi medallion market, however, even the perception that they’re a less valuable investment could mean the jig is up.

This seems to be weighing on Medallion Financial’s fortunes. Its stock has dropped more than 30 percent since late November, and several of the company’s executives have unloaded shares, including its chairman and its chief financial officer. Short interest in the stock has increased by a factor of nine since November.

Murstein says the company’s recent struggles are just a byproduct of Uber froth. “People want to back into a way to invest in Uber, and since we are the only public company in the taxi industry, they are stretching,” he wrote in an e-mail on Monday. “They will regret it.”

Uber has always baffled some Manhattanites, who live in a place where taxis are more reliable than probably anywhere else in the world. Why do you need an app to call a car when stepping off the curb and raising your hand works almost instantaneously? Given that Uber’s pricing had always made it seem like a luxury, the overlap with the humble yellow cab was relatively minimal.

But Uber could make things tricky if it commits to an Amazonian strategy of accepting losses to get people accustomed to using it regularly. Because taxis run on meters whose rates are set by the local government, yellow-cab fleets wouldn’t be able to respond immediately to competition offering cheaper rides. And if Uber drivers proliferated to the point that calling one was as convenient as hailing a cab, the income someone could make from owning a medallion would presumably drop.

Uber certainly could afford to give this a shot. Its most recent fundraising round valued it at $17 billion. But such an approach would have risks. Part of the company’s core philosophy is that Uber drivers are essentially running their own businesses, rather than working for it directly. If each ride became less lucrative, Uber might have a harder time persuading drivers to hit the streets. The company says this won’t happen: Lowering fares means more riders, which translates to higher incomes for its drivers.

The prospects of a New York price war get a little confusing, because Uber also says it needs to be able to increase its fares at a moment’s notice to convince drivers that working is worth their while. Aside from Uber’s constant legislative fights, this surge pricing has been the most controversial part of its business model. If the company succeeded in using low prices to lure New Yorkers away from taxis, surge pricing could become more common. Drivers for Uber’s higher-end services already complain about this in San Francisco, where UberX prices regularly hit surge-pricing levels on a normal weekday afternoon. The lower prices are like an advertisement bringing people to UberX, but then they pay what amounts to standard Uber prices.

Compared with that uncertainty, the reliability of a good old yellow-cab meter might seem like an attractive alternative.